An Antitrust Analysis of Google's Proposed Acquisition of Doubleclick
Total Page：16
File Type：pdf, Size：1020Kb
JOINT CENTER AEI-BROOKINGS JOINT CENTER FOR REGULATORY STUDIES An Antitrust Analysis of Google’s Proposed Acquisition of DoubleClick Robert W. Hahn and Hal J. Singer Related Publication 07-24 September 2007 An Antitrust Analysis of Google’s Proposed Acquisition of DoubleClick Robert W. Hahn† Hal J. Singer†† By serving as a key revenue source for online content providers, online advertising has been instrumental in the development of innovative websites. Continued innovation among content providers, however, depends critically on the competitive provision of online advertising. Suppliers of online advertising provide three primary inputs—(1) advertiser tools, (2) intermediation services, and (3) publisher tools. Certain suppliers such as Google provide a platform that combines the inputs into one integrated service. In this paper, we focus on the overlapping products sold to advertisers by Google and DoubleClick—namely, the supply of advertiser tools. Because the supply of advertiser tools is highly concentrated, Google’s proposed acquisition of DoubleClick raises important questions for antitrust authorities. Proponents of this acquisition argue that Google and DoubleClick do not compete—that is, buyers of search-based or contextual-based advertising (the two advertising channels in which Google participates) do not perceive graphic-based advertising (the advertising channel in which DoubleClick participates) to be substitutes. Thus, they conclude that the proposed acquisition would not lead to higher prices. In this paper, we examine economic evidence and legal precedent to help identify the relevant antitrust product market for Google’s proposed acquisition of DoubleClick. According to the Federal Trade Commission and Department of Justice Horizontal Merger Guidelines, product markets are defined by the response of buyers to relative changes in prices. To inform how buyers—in this case, online advertisers—would respond to relative changes in price across the three online advertising channels (search, contextual, and display), we analyze the results of a survey of online retailers. The survey suggests that (1) a significant share of online advertisers would substitute among the three channels in response to relative changes in prices, and (2) a significant share of DoubleClick customers would turn to Google before any other supplier in response to an increase in the price of DoubleClick’s advertiser tools. In particular, the survey indicates that a combined Google-DoubleClick would likely have a greater incentive to increase the price of DoubleClick’s advertiser tools relative to a stand-alone DoubleClick offering. I. INTRODUCTION ............................................................................................................ 2 II. THE ONLINE ADVERTISING INDUSTRY......................................................................... 8 A. The Search Segment........................................................................................... 11 B. The Publisher-Based Segment ........................................................................... 14 1. Contextual Ads............................................................................................ 15 2. Graphic Ads................................................................................................ 16 † Director, AEI-Brookings Joint Center for Regulatory Studies. †† President, Criterion Economics, L.L.C. We would like to thank Robert Crandall and Robert Litan for their insightful comments. We would like to thank Keith Klovers and Molly Wells for excellent research assistance. AT&T and Microsoft provided support for this research. The views in this paper represent those of the authors and do not necessarily represent the views of the institutions with which they are affiliated. © 2007 by the authors. All rights reserved. 2 Robert W. Hahn & Hal J. Singer III. PREVIOUS ATTEMPTS TO DEFINE THE RELEVANT PRODUCT MARKET FOR ADVERTISING INDUSTRIES ......................................................................................... 19 A. The FCC’s 2002 Biennial Regulatory Review ................................................... 20 B. Prometheus Radio Project, et al. v. F.C.C......................................................... 20 C. KinderStart.com LLC v. Google, Inc. ................................................................ 21 IV. THE RELEVANT PRODUCT MARKET FOR ANALYZING THE COMPETITIVE EFFECTS OF GOOGLE’S PROPOSED ACQUISITION OF DOUBLECLICK ............................................. 23 A. Market-Based Evidence of Substitution Patterns............................................... 23 1. Demand-Side Evidence............................................................................... 23 2. Supply-Side Evidence.................................................................................. 24 B. Survey Data........................................................................................................ 25 1. Do Advertisers View Graphic Ads as Substitutes for Contextual or Search Ads? ............................................................................................................ 26 2. How Would Current DoubleClick Customers React to a Price Increase? . 30 C. Advertiser Tools Used in the Production of Search Ads and Publisher-Based Ads Constitute a Relevant Product Market........................................................ 34 V. IMPLICATIONS FOR GOOGLE’S PROPOSED ACQUISITION OF DOUBLECLICK............... 34 A. Concentration Analysis...................................................................................... 35 B. Potential Harm to Advertisers ........................................................................... 38 1. Higher Prices for Advertiser Tools............................................................. 38 2. Other Potential Harms to Advertisers ........................................................ 39 VI. CONCLUSION............................................................................................................... 40 APPENDIX A: ALTERNATIVE HHI ANALYSES ................................................................... 41 APPENDIX B: SURVEY QUESTIONNAIRE............................................................................ 45 I. INTRODUCTION Online advertising has played a key role in the emergence of a vast amount of Internet content. In 2007, U.S. advertisers were expected for the first time to spend more on online advertising than on radio advertising.1 Without the revenue that websites generate from posting advertising on their pages, countless applications and social networks such as WashingtonPost.com, Engadget, and MySpace would not likely have been economically viable. Advertisers bear the cost of webpage development through advertising fees; the alternative—charging consumers subscription fees—would result in a smaller online environment. This result follows from the fact that end users are generally more price-sensitive than advertisers. Considering the rapid pace of consolidation among online advertising firms, Google’s planned acquisition of DoubleClick presents antitrust authorities with a much-needed opportunity to define the relevant antitrust product market for merger review. According to the U.S. Department of Justice and Federal Trade Commission Horizontal Merger Guidelines (“Merger Guidelines”), product markets are defined as the smallest group of services such that a hypothetical monopoly provider of those services could profitably raise prices above 1. Ben Macklin, Radio Trends: On Air and Online, EMARKETER, Aug. 2007, abstract available at http://www.emarketer.com/Reports/All/Emarketer_2000409. aspx?src=report_head_info_sitesearch (“By 2008, online advertising in the US is expected to surpass radio advertising spending.”). For 2007, eMarketer projects $21.7 billion in spending on online advertising, versus $20.4 billion for radio advertising. September 2007 Google’s Proposed Acquisition of DoubleClick 3 competitive rates.2 Fortunately, past efforts by the courts and other antitrust authorities provide boundaries within which the Federal Trade Commission (FTC) can define a relevant product market for the purpose of analyzing the competitive effects of the proposed acquisition. In the absence of data on how buyers have responded to relative changes in prices, survey data—such as the European Commission’s pending survey of Google’s customers—can be used to help define the relevant product market.3 The proposed acquisition has received much attention from the press and analysts. For example, Stiefel Nicolaus analysts have identified several antitrust concerns that they feel will have to be addressed before Google’s proposed acquisition of DoubleClick can move forward. The first concern is that Google may accumulate so much consumer data—which can be used to more effectively target advertising—that it may reach a tipping point that limits new entrants into the online advertising market.4 This concern suggests that new entrants would not have comparable consumer information, and thus would begin at a significant competitive disadvantage to Google. The acquisition could also put existing rivals at a permanent competitive disadvantage, which could impair their ability to compete effectively. The analysts also note that consumer privacy may also be harmed by this acquisition. They point to the 2000 purchase of Abacus by DoubleClick, an event that sparked a privacy battle and, ultimately, a consent decree maintaining the separation